Yahoo Gold Mining Company (YGMC) mines coal, puts it through aone-step crushing process, and loads the bulk raw coal onto riverbarges for shipment to customers.
YGMC’s management is currently evaluating the possibility offurther processing the raw coal by sizing and cleaning it andselling it to an expanded set of customers at higher prices. Theoption of building a new sizing and cleaning plant is ruled out asbeing financially infeasible. Instead, Darrell Cornwall, a miningengineer, is asked to explore outside contracting arrangements forthe cleaning and sizing process.
Darrell puts together the following summary:
Selling price of raw coal = $27 per tonne
Cost of producing raw coal = $22 per tonne
Selling price of sized and cleaned coal = $36 per tonne
Annual raw coal output = 10,000,000 tonnes
Percentage of material weight loss in sizing/cleaning coal = 6%
Incremental Costs of Sizing and Cleaning Processes
Direct labour = $800,000 per year
Supervisory personnel = 200,000 per year
Heavy equipment: rental, operating, maintenance costs = 25,000 permonth
Contract sizing and cleaning = 3.50 per tonne of raw coal
Outbound rail freight = 240 per 60-tonne rail car
Darrell also learns that 75% of the material loss that occurs inthe cleaning and sizing process can be salvaged as coal fines,which can be sold to steel manufacturers for their furnaces. Thesale of coal fines is erratic and YGMC may need to stockpile it ina protected area for up to one year. The selling price of coalfines ranges from $15 to $24 per tonne and costs of preparing coalfines for sale range from $2 to $4 per tonne.
Required
1) Prepare an analysis to show whether it is more profitable forYGMC to continue selling raw bulk coal or to process it furtherthrough sizing and cleaning. (Ignore coal fines in youranalysis.)
2) How would your analysis be affected if the cost of producing rawcoal could be held down to $20 per tonne?
3) Now consider the potential value of the coal fines and preparean addendum that shows how their value affects the results of youranalysis prepared in requirement 1.
